DB Surpluses: Whose Money Is It Anyway?

By David Brooks, Head of Policy

Summary

David Brooks, Head of Policy at Broadstone, explores who should benefit from DB pension surpluses and argues that, rather than focusing only on ownership, schemes should also consider whether surplus could be used to strengthen retirement provision more broadly.

Table of Contents

DB pension surpluses are back on the agenda

As schemes become better funded and policymakers consider making it easier to access surplus, a familiar debate has returned. Employers argue that they funded the promises, repaired the deficits and bore the risks. Members argue that assets held within a pension scheme should remain for members’ benefit.

There’s truth in both positions. But before deciding who should benefit, it’s worth considering that some surpluses might be more equal than others.

Employers funded the deficits – but members shared the pain

In many cases, employers paid significant sums to support their schemes. But the journey back to health often involved sacrifices by members too.

Across the DB landscape, schemes closed to new entrants and future accrual, reduced discretionary benefits and replaced DB promises with DC arrangements that were rarely equivalent to what had gone before. Those changes reduced cost and risk.

Members may not have written the deficit repair cheques, but many experienced part of the pain associated with putting schemes on a more sustainable footing. Some of today’s surpluses may therefore also reflect decisions that reduced members’ future benefit expectations.

That does not create a clear entitlement to surplus. But it makes the argument that “the employer paid for it, therefore it belongs to the employer” less straightforward.

Fairness is easier to argue than to deliver

Once fairness enters the discussion, practical problems quickly follow.

Which members should benefit: pensioners, deferred members, active members or those affected by benefit changes?

The debate begins to resemble the judgment of King Solomon. Everyone can identify reasons why they deserve a share, but dividing a surplus accumulated over decades between multiple groups quickly becomes an exercise with no obviously fair answer.

An ongoing scheme changes the surplus question

Historically, surplus debates tended to arise at wind-up, once benefits had been secured and the scheme’s obligations effectively discharged.

The current debate is different. The Government’s proposals contemplate greater access to surplus while schemes remain ongoing. Benefits may be well funded and risks substantially reduced, but they have not disappeared. Trustees are still managing funding and investment risks, members still depend on the scheme, and employers still stand behind it.

The question is therefore no longer simply how to distribute money left over after the job is done. It is whether assets can be extracted from a system that is still performing that job.

Perhaps the better question is what surplus is for

Once that distinction is recognised, ownership starts to look less important than another question: what is the surplus for?

Many employers now sponsor closed DB schemes while providing DC arrangements for their workforce. If surplus could be used more flexibly, it might help improve pension provision for employees who will never benefit from DB pensions themselves.

It offers another way of thinking about surplus: not simply as an employer asset or a member asset, but as a retirement asset.

Once benefits are secure and appropriate safeguards are in place, policymakers might ask whether some surpluses could strengthen retirement provision more broadly.

The answer will differ from scheme to scheme. But it may be a more productive debate than arguing endlessly about whose money it is anyway.

Get in touch with Broadstone

If you are considering how surplus flexibility could affect your scheme’s long-term strategy, member outcomes or endgame planning, Broadstone can help.

Get in touch with our pensions team to discuss the options for your scheme.